Determinants of Money Demand in Algeria: An Empirical Study during the Period (1980-2017)

This investigation aims primarily to estimate the determinants of the demand function of money in its
broad sense, in Algeria during the period 1980-2017. To accomplish this study, Cointegration and
Error Correction Model (ECM) have been used. Thus, these tests proved the no stationary of time
series which led us to apply the cointegration tests, so in the end we estimate the model with error
correction and investigate the impact of shocks on demand for money over the same period. The
results of this estimation show that the importance of determinants of money demand in the short and
long term are ordered as follows: Real income, the velocity of circulation of money (VM2) in the short
and long term, the long-term exchange rate; in the short term its importance diminishes in favor of
inflation, which has a decisive effect on the demand for money in the short term. The findings reveal
that the money demand function is insensitive to the interest rate, which explains why speculation is
generally regarded as a less important reason in Algeria.